The Advertising Economy

May 2008

Once Upon a Time, Marketing = Media + Creative

•Traditional media was primary (sole?) venue for communications objectives

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But Fragmentation Fractured That Proposition

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New Platforms Would Make Change Possible
120.0% Mobile Phone Subscriptions 100.0% Multichannel Homes % of US Households 80.0% Broadband Homes 60.0% VOD Homes 40.0% DVR Homes

20.0% HD Subscriptions 2000 2001 2002 2003 2004 2005 2006 2007 2008 Satellite Radio Subscriptions 2009 2010 2011

0.0%

4

Source: MAGNA Global

Music Was The Canary In The Coal Mine
•Digitization changed production, distribution and consumption
Manufacturers' Shipments of Recorded Music
18,000 Revenues ($000s) 16,000 14,000 12,000 10,000 8,000 6,000 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Napster Launched (June 1999) BitTorrent, Kazaa, Grokster, etc. active iTunes Launch (March 2003) Total Digital Sales Retail Sales

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Source: MAGNA Global, RIAA

The Venture World Would Shake Everything Else Up
•Thousands of new models would surely change everything
Traditional Medium Equivalent / Ad-Supported Revenue Driver Radio/Music UGC Production Social Content Consumption Niche Content Consumption New Place Consumption Asset Management Content-onDemand Information Seeking Commerce / Shopping Game Playing Individual or Corporate Behavior Driver
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TV

Online/Print

Out-of-Home

Marketing Services

Other Marketing

Source: MAGNA Global

And DVRs Were To Be The Last Nail In The Coffin

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With A Digital Revolution Blooming In The Aftermath

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But Traditional Media Never Died

“Television is the worst form of advertising, except all the others that have been tried”

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But Traditional Media Never Died
•New advertisers rely on it for mass branding effects
Top 10 Network TV Advertisers 1987 1 2 3 4 5 6 7 8 9 10 McDonald's KFC Burger King Miller Lite Budweiser AT&T Wendy's American Express Miller High Life Advil 1 2 3 4 5 6 7 8 9 10 2007 AT&T Wireless Verizon Sprint McDonald's Home Depot T-Mobile Subway Toyota Tundra Lowes Wendy's

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Source: MAGNA Global analysis of TNS-CMR data

But Traditional Media Never Died
•Large brand-based advertisers: focus on reach…
Network TV Prime Time Reach - Live Only Adults 18-49
100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 96.17% 96.72%

2002

2007

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Source: Initiative Analysis of Nielsen Data

But Traditional Media Never Died
•…And frequency
Millions of Person-Hours Per Year

Total US Population: Hours Spent With Media
600,000 500,000 400,000 300,000 241.3bn 200,000 100,000 0 2005 2006 2007 2008 2009 2010 56.9bn 51.3bn 37.0bn 1.8bn
Consumer Magazines Search

539.0bn

TV Radio Total Internet Newspapers

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Source: MAGNA Global, US Census, Veronis Suhler, OPA

But Traditional Media Never Died
•This is true in established markets…
Media Reach By Country
100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Newspapers Magazines Internet Radio TV
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Source: MAGNA Global, WARC, InternetWorldStats. Weekly reach figures for France and UK, daily for other countries. Reach definition for magazines = issue reach in France, Italy and Spain. Internet reach typically = % of population online monthly per Nielsen NetRatings, ITU and other sources as of June 30 2007 (except for US = March 31, 2007)

But Traditional Media Never Died
•…And emerging ones
Media Reach By Country
100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Radio TV Newspapers Magazines Internet

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Source: MAGNA Global, WARC, InternetWorldStats. Weekly figures for Brazil and Russia. Russia, China and India magazines are issue reach figures. Indian TV and radio = daily, newspapers = issue. Chinese TV = weekly and radio = daily. Internet typically = % of population online monthly per Nielsen NetRatings, ITU and other sources as of June 30 2007

But Traditional Media Never Died
•It also holds for young audiences…
Young Audiences' TV Viewing Trends
Hours of Viewing Per Week 29.0 27.0 25.0 23.0 21.0 19.0 17.0 15.0 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 P18-34 P6-11 P12-17 P2-5

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Source: MAGNA Global analysis of Nielsen Media Research data

But Traditional Media Never Died
•…In the US and around the world
TV Reach: Adults and Teens
100.0% 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
Germany France Brazil Italy UK US Spain India Russia China

Adults Teens

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Source: WARC

But Traditional Media Never Died
•Is New Media always a better substitute? Consider criteria

Yes!
General Print TV

Not Really
Limited TV content available today Internet can’t deliver high res video well Print is tactile IPTV: no STB integration QoS is critical for video Hard to navigate to find audio/video Online bandwidth can be expensive to provide Print is typically portable

Sufficient Range of Content Sufficient Technical Quality Equipment Substitution Sufficient Customer Service Efficient Navigation Cheaper to Substitute Increased Convenience SUMMARY

Prospects for online media substitution limited by drawbacks relative to traditional media

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Source: MAGNA Global

But Traditional Media Never Died
•Reflected in actual usage
• Conventional TV popularity: 100x vs. Online in 2011?
200.0x 180.0x 160.0x 140.0x 120.0x 100.0x 80.0x 60.0x 40.0x 20.0x 0.0x
Popularity Factor of Conventional TV in 2011

Below Trend 145.8x 119.8x 99.2x

2007 Growth Rate Was 34.4%

Above Trend 82.7x 69.4x

58.6x

25%

30%

35%

40%

45%

50%

Different Scenarios: Assumed 4-Year Compounded Annual Growth Rate of Online Video

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Source: MAGNA Global, Accustream

Communications Extends Beyond Media

“The company is (putting) retail marketing strategy under the same marketing directors who oversee brand teams

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Communications Extends Beyond Media
•Large advertisers’ real shift: non-media marketing

Hershey Promotion and Advertising Expense 6-Year CAGR
25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% 2001 2002 2003 2004 2005 2006 2007 Advertising Growth -6.2% Promotion Growth 8.8%

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Source: MAGNA Global, Company Reports

Communications Extends Beyond Media
•Large advertisers’ real shift: non-media marketing

Coca-Cola Selling and Advertising 6-Year CAGR
35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Selling Expense Growth 12.8% Advertising Expense Growth 6.5%

2001

2002

2003

2004

2005

2006

2007

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Source: MAGNA Global, Company Reports

Communications Extends Beyond Media
•Large advertisers’ real shift: non-media marketing

Liz Claiborne Marketing and Advertising 6-Year CAGR
25.0% 20.0% 15.0% 10.0% Advertising Growth 5.0% 0.0% -5.0% -10.0% 2001 2002 2003 2004 2005 2006 2007 4.4% Marketing Growth 9.0%

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Source: MAGNA Global, Company Reports

Communications Extends Beyond Media
•Large advertisers’ real shift: non-media marketing

Wrigley Merchandising, Selling and Advertising 6-Year CAGR
60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Advertising Growth 10.0% 2001 2002 Merchandising and Promotions/Other Growth 15.2%

Selling and other Marketing Growth 16.2%

2003

2004

2005

2006

2007

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Source: MAGNA Global, Company Reports

Drivers of Online Spend = Endemics, New Businesses
•Largest advertisers drive TV, smaller advertisers drive online

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Source: MAGNA Global analysis of TNS-CMR data

Drivers of Online Spend = Endemics, New Businesses
•Online allows for lower cost, narrow reaching campaigns
2006: Unique Advertisers By Medium
9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

Network TV

Internet Display

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Source: MAGNA Global analysis of TNS-CMR data

Drivers of Online Spend = Endemics, New Businesses
•Search primarily driven by small businesses + e-commerce
Search Spending as % of E-Commerce Sales
8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
1Q00A 2Q00A 3Q00A 4Q00A 1Q01A 2Q01A 3Q01A 4Q01A 1Q02A 2Q02A 3Q02A 4Q02A 1Q03A 2Q03A 3Q03A 4Q03A 1Q04A 2Q04A 3Q04A 4Q04A 1Q05A 2Q05A 3Q05A 4Q05A 1Q06A 2Q06A 3Q06A 4Q06A 1Q07A 2Q07A 3Q07A 4Q07A
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Source: MAGNA Global, IAB, BEA

Drivers of Online Spend = Endemics, New Businesses
•Reflecting effectiveness for SMEs…
Advertising Dollars Spent Per Hour of Media Consumption
$10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 2005 2006 2007 2008 2009 2010

$9.39

Search Newspapers Total Internet Consumer Magazines TV Radio

$0.94 $0.58 $0.33 $0.10 $0.08

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Source: MAGNA Global, US Census, Veronis Suhler

Emerging Media Advertising: Sources of Revenue
•Beyond search, emerging media = small business today

2007E Emerging Media Advertising $10,000.0 $8,000.0 $6,000.0 $4,000.0 $2,000.0 $0.0 Search All Other

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Source: MAGNA Global, IAB

Revenues in Millions

Emerging Media Advertising: Sources of Revenue
•Sub-scale media: more effective for sub-scale advertisers(?)
• Emerging media requires ad hoc processes and workflows • Most or all processes in smaller advertisers are ad hoc!

or

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Emerging Media Advertising: Sources of Revenue
•…But “gut” decisions on “feel” frequently drive allocations
• Use of newer media can be similar to magazines: it “feels” right

=

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Emerging Media Advertising: Sources of Revenue
•What will cause advertisers to use more emerging media?
• Traditional media stops working

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Emerging Media Advertising: Sources of Revenue
•What will cause advertisers to use more emerging media?
• Better infrastructure

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Emerging Media Advertising: Sources of Revenue
•What will cause advertisers to use more emerging media?
• Better-aligned organizations

CEO
Other Corporate Functions

PR / Corporate Communications

COO

Operating Division
Product Development Branding

Operating Division
Product Development Branding

Operating Division
Product Development Branding

Direct / Online Sales
Creative

CMO / Central Marketing
Media

Retail Distribution
Other

Marketing, PR, Retail, Sales

Marketing, PR, Retail, Sales

Marketing, PR, Retail, Sales

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Source: MAGNA Global

Emerging Media Advertising: Sources of Revenue
•What will cause advertisers to use more emerging media?
• Focus on people, not pages (or ratings)

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Emerging Media Advertising: Sources of Revenue
•What will cause advertisers to use more emerging media?
• Ability to assess value, not cost
Top 10 DMAs National Network

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Emerging Media Advertising: Sources of Revenue
•What will cause advertisers to use more emerging media?
• Ability to actually use data

=

+

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Emerging Media Advertising: Sources of Revenue
•So when is emerging media used?
• Niche-focused brands or marketing objectives • Reaching consumers across multiple touch-points • Experimentation / internal learning / preparation for the future

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What Have We Learned Today?
We thought we could make money on the internet While the internet is new and exciting…it hasn’t matured as a distribution mechanism It will be a few years before…media on the internet can be monetized - Kyle Broflofski, April 2008

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Summary

Old Media: Not Dead Yet, Becomes Digital

Below The Line: Growth Driver For Largest Advertisers

New Media: Systemic Limits for Most Large Advertisers

Online Display: Focus on Endemics, Commerce

Online Search: Led by Small Businesses, Commerce

Emerging Media: Niches, Multiple Touch Points or Tests

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Contacts: Brian Wieser, CFA Tel: 646-865-2260 Email: brian.wieser@magnaglobal.com

www.interpublic.com/news+ideas/research

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